Paradox of toil
Encyclopedia
The paradox of toil is the economic hypothesis that employment will continue to shrink when "the short-term nominal interest rate is zero and there are
deflationary pressures and output contraction". The idea is that a local or sectoral wage reduction that might increase the number of jobs available will increase employment globally if virtually all employers reduce wages is advanced as a case of the fallacy of composition
.
Put simply, when a recessionary economy is up against the zero bound, having more people seeking work - at lower wages if necessary - can actually reduce the number of jobs.
The term was intended to parallel "paradox of thrift
", a concept resurrected by John Maynard Keynes
and popularized under that name by Paul Samuelson
.
The paradox of toil was proposed by economist Gauti Eggertsson in 2009.
These, he said, failed to demonstrate the paradoxical effects.
Eggertsson responded that seasonal labor supply variations, being relatively predictable, would have negligible effect on nominal short-term interest rates; and that an increase in minimum wage affected only aggregate employment, with paradox of toil saying nothing about composition.
Paul Krugman
and Eggertson have since proposed that the paradox of toil and the paradox of flexibility mean that wage and price flexibility do not facilitate recovery from recessions, but actually exacerbate them.
Claiming some influence from Eggertsson, some New Keynesian economists have suggested that, under similar assumptions, all government stimulus spending has a crowding out
effect.
deflationary pressures and output contraction". The idea is that a local or sectoral wage reduction that might increase the number of jobs available will increase employment globally if virtually all employers reduce wages is advanced as a case of the fallacy of composition
Fallacy of composition
The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole...
.
Put simply, when a recessionary economy is up against the zero bound, having more people seeking work - at lower wages if necessary - can actually reduce the number of jobs.
The term was intended to parallel "paradox of thrift
Paradox of thrift
The paradox of thrift is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees, and similar sentiments date to antiquity...
", a concept resurrected by John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
and popularized under that name by Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...
.
The paradox of toil was proposed by economist Gauti Eggertsson in 2009.
Debate
Casey Mulligan argued against this effect, proposing several natural tests, among them:- seasonal fluctuations in the job market in 2009 and 2009;
- the increase in the U.S. minimum wage in 2009.
These, he said, failed to demonstrate the paradoxical effects.
Eggertsson responded that seasonal labor supply variations, being relatively predictable, would have negligible effect on nominal short-term interest rates; and that an increase in minimum wage affected only aggregate employment, with paradox of toil saying nothing about composition.
Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
and Eggertson have since proposed that the paradox of toil and the paradox of flexibility mean that wage and price flexibility do not facilitate recovery from recessions, but actually exacerbate them.
Influence
The reasoning behind the paradox of toil, together with the paradox of flexibility, has led to speculation that there might be a "paradox of innovation" by which greater labor productivity or cheaper products reduces demand for labor, which reduces wages, and therefore reduces demand overall.Claiming some influence from Eggertsson, some New Keynesian economists have suggested that, under similar assumptions, all government stimulus spending has a crowding out
Crowding out (economics)
In economics, crowding out occurs when Expansionary Fiscal Policy causes interest rates to rise, thereby reducing private spending. That means increase in government spending crowds out investment spending....
effect.
External links
- "Double, double, toil and trouble: the paradox of toil", The EconomistThe EconomistThe Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
: Free Exchange, 2 May 2010 - The paradox of toil, Money Supply, Financial TimesFinancial TimesThe Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
, 15 December 2009 - "Up is down", The EconomistThe EconomistThe Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...
: Free Exchange, 14 December 2009